Earnings Before Interest, Tax, Depreciation, and Amortization (EBITDA)
EBITA is a method used to value a company based on its operating performance without having to factor in financial, accounting or tax decisions
EBITDA Stands For:
Earnings Before Interest Tax Depreciation & Amortization
Earnings Before Interest Tax Depreciation & Amortization
What is EBITDA USED FOR
- Used to evaluate a company's operational performance
- Focuses on operating profitability
- Ignores capital structure and how the business is taxed
- Makes it easy to compare companies across an industry, even if they have different capital structures
- Commonly used in the Private Equity business to value a company
- Also used in public markets to value companies
- Considered to be a measure of how much debt a company can handle (debt service capacity)
EBITDA Cautions
- Don't rely on it as the only valuation metric - have to consider other aspects like future capital/investment needs as well
EBIDTA Criticisms
- Focuses on earnings instead of cashflow
- Does not look at quality of earnigs
- May be deceiving if a company requires significant new or ongoing capital investment
- Can make companies valuations seem cheaper if there is significant depreciation or amortization
- The word owes its existence to dishonest money (Anthony Deden said this)